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When deciding how to finance or refinance your home, it’s important to explore all your options. That includes investigating the pros and cons of the two main types of mortgages: adjustable-rate mortgages and fixed-rate mortgages.
But how do you decide which option is best for you? Here are some things to consider when making your choice:
A fixed-rate mortgage has the same interest rate from when you take out the loan until you pay it off. With an ARM loan, also known as an adjustable-rate mortgage, the interest rate is set for a specific amount of time and may go up or down after that adjustment period.
For example, with a 10/6 ARM, the interest rate is fixed for 10 years, and then the interest rate will adjust every six months for the duration of your loan.
Hearing that your interest rate could change after 10 years can make consumers uneasy, perhaps triggering memories of the 2008 housing crisis (though, it’s important to remember that ARM mortgages themselves didn’t cause the crisis; it was much more complex than that). People often forget about or don’t know about 10/6 ARMs, and only think of 3/1 and 3/6, or 5/1 and 5/6 ARMs, which lock in rates for only three and five years, respectively. Additionally, the 30-year fixed mortgage is the “standard” most home buyers are accustomed to hearing about because it’s most often featured in advertisements.
Learning more about the benefits of a 10/6 ARM vs. a 30-year fixed mortgage can ease uncertainty and help you make a more informed decision when buying a new home or refinance your current mortgage.
A 10/6 ARM and 10/1 ARM have the same fixed rate period of 10 years. Once that period is over, the rate on a 10/6 ARM changes every six months. The rate on a 10/1 ARM changes every (one) year after the 10-year fixed rate period.
A 10/6 ARM has a fixed rate period of ten years and can sometimes provide homeowners with the “best of both worlds,” providing them a lower interest rate than fixed rate loans such as a 30-year fixed but with more stability than a 5/6 ARM.
When deciding whether a 10/6 ARM is right for you, here are a few questions to consider:
When mortgage rates are at a low-interest period, a fixed-rate mortgage may make the most sense. However, when interest rates are rising, it’s a different market. The average rate difference between a 10/6 ARM and a 30-year fixed mortgage can be about 0.5% to 0.75%.
For example, let’s say you’re buying a new home, and the spread between the two rates is 0.5%. In this case, you’re choosing between a $300,000, 30-year fixed mortgage at 6.30% APR and a 10/6 ARM at 5.70% APR. Your monthly payment would be about $1,857 for the 30-year fixed and only $1,741 for the 10/6 ARM. While $116 a month might not look like much, that adds up to nearly $14,000 of payment savings over the first 10 years. Multiply that savings by several moves in a lifetime, and you could find tens of thousands of dollars in savings.
An easy way to do the math and compare the payment amounts for a 10/6 ARM and 30-year fixed mortgage is with a mortgage payment calculator. Just plug in your loan amount, interest rate and term to get an estimate of your monthly mortgage payment with principal and interest.
You might also be able to save money on loan origination fees and avoid having to pay for private mortgage insurance (PMI) with a 10/6 ARM versus a 30-year fixed mortgage. Be sure to ask your loan officer about those options as well.
Compared to a generation or two ago, whether due to life-stage changes or switching jobs, people are moving and refinancing much more often. On average, a US homeowner will stay in their home for 12.3 years.
Whether you choose a 10/6 ARM or 30-year fixed mortgage, it’s essential to establish and keep an ongoing relationship with your mortgage loan officer. They will keep an eye on the market and let you know when and if it makes sense to refinance. For example, if rates are lower a couple of years after you buy your home, they might suggest refinancing from an ARM to a fixed-rate mortgage. Ultimately, your mortgage loan officer wants to help educate you and save you money so you can reach your financial goals.
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